1)An MNC or a multinational corporation has business entities (wiseGEEK, 2013) operating in many countries. It has its main headquarter in its home country while having offices, factories in other countries (Investopedia, 2013).
These companies set up branches in other countries to take the relative comparative advantages those countries may offer(International Finance Study Guide, 2013) 2)Currency exchange risks occur as the exchange rates fluctuate every second throughout the day.
MNCs often deal with large transactions in which they may need to pay or receive large sums of money within certain period of time, exchange rate fluctuations are crucial as they may affect the company’s earning greatly(Ayse, 2013).
a)Transaction Risks This is the most common type of risks faced by the MNCs. MNCs deals with account receivables, account payables and dividends. There will be a time frame between the transaction date and the actual receive or pay out date. In between these dates there can be fluctuations in exchange rates which will contribute to company’s profit or loss (studymode, 2002).
For example, if a Singapore company strikes a deal with an American company today which results in one million United States dollars to be received in a month’s time. Come to the actual paying date the following can occur: Transaction DateUSD/SGDPayment DateUSD/SGD 1st Jan 20131. 2500 Scenario One : 1st Feb 20131. 2600 (USD strengthens against SGD) Scenario Two : 1st Feb 20131. 2400 (USD weakens against SGD) Scenario One: With the strengthening of USD by 100 points against SIN, the company profits: SGD 1,000,000 x 0. 01 = SGD 10,000
The Essay on Cultural Training Cross Companies Countries
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Scenario Two: With the weakening of USD by 100 points against SIN, the company loses: SGD 1,000,000 x 0. 01 = SGD 10,000 b)Translation Risks This risk is basically involves exchange rate risks with balance sheets relating to subsidiary companies in foreign countries. This will in turn affect the “consolidation of a foreign subsidiary to the parent company’s balance sheet” (Michael, 2006).
As a result, exchange rate for balance sheets is used at the time of consolidation. c)Economic Risks It pertains to the present value of company’s future cash flow.
As mentioned above, cash flows for the company are always in future timeframe of a month or even months later, be it the parent company or the foreign company. Thus economic trends need to be closely observed in order to implement strategy or plans to prevent losses. It also affects the price of imports and exports which will either make the company’s products less competitive in the foreign market or cause the price increase of raw materials imported to increase which result in higher cost of production (Michael, 2006).
3)There are three foreign exchange instruments that can be used to hedge the company’s exposure:
i)Forward contracts It is a deferred cash market transaction where either the purchase price or the selling price of a commodity or asset has been pre agreed by a contract but will only make delivery in the future(Investopedia, 2013)(Wikinvest, 2012).
“Forward is a non-standardized contract between two parties to buy or sell an asset at a specified future time at a price agreed upon today” (Wikipedia, 2013).
ii)Future contracts It is similar to forward contract but is a more standardised and is done on trading floors and future exchange markets (wikipedia, 2013) (investopedia, 2013).
The Essay on Foreign exchange option pricing: A practitioner’s guide
Introduction of computers have come with many changes in peoples live. These changes are felt across the globe due to the impact they make on human live. Among these impacts is change of culture, faster relay of information, creating of employment while still making some people lose their employment. The most positive change that computers have brought is globalisation that is making the ...
Examples are Chicago Mercantile Exchange and London International Financial Futures & Options Exchange (International Finance Study Guide, 2013) iii)Options contracts An option contract gives you the right to buy and sell an asset, or in this case, currency (Investopedia, 2013).
It is not an obligation to carry out the option if is it not to your benefit. An option usually has a strike price and an expiry date. Upon maturity, the purchaser can choose whether to exercise the option or let is lapse. Once it expires it no longer serves any value.
(Beth, 2012)(Option Industry Council, 2013) 4)Advantages and disadvantages of each instrument i)Forward contracts Advantages: a)Forwards are flexible in terms amount transacted. It can go to amounts like up to cents such as $1234. 56. (Finance Learners, 2013) b)Forwards are over the counter products in an unregulated market which means there are flexibility in terms and conditions. As long as the two parties agree, any clause can be made(Khali, Mohammed, 2013) c)It offers a complete hedge of risks that maybe involved.
Like buying insurance, it offers protection in the case market move in way that is of disadvantage to you. (Finance Learners, 2013) Disadvantages: a)The flexibility in terms and conditions also causes illiquidity in forward contracts. It can only be exercised upon maturity and if the buyer needs cash before maturity, it is not possible. Unless a third party can be found to take over the forward contract, but that will depend if he third party is able to accept and terms and conditions set forth between the original buyer and seller of the forward contract(Finance Learners, 2013)(Khali, Mohammed, 2013).
b)It is subjected to default risk. Both parties of the forward contract must trust each other to honour the contract upon maturity, as it is not regulated (Khali, Mohammed, 2013).
c)It offers protection on one side but also forfeit the possible profits one can make. For example if you are receiving foreign currency in one month’s time and the anticipation of a quoted currency is to depreciate. You hedge using a forward to lock an exchange rate so you will not suffer loss when the foreign currency weakens.
The Essay on Jsb Market Research – the Future of the Dairy Food Market in the United States
The Future of the Dairy Food Market in the United States to 2018 Published On 12th May 2014 The dairy market in the United States is set to see impressive growth of over 3% over the next four years. Summary The Future of the Dairy Food Market in the United States to 2018 is the result of Canadeans extensive market research. The report presents detailed analysis on the Dairy Food consumption trends ...
However instead of moving down, the foreign currency appreciates so you lose out the possible profit you can make on the exchange rate had you not taken up the forward contract. ii)Future contracts Advantages: a)It is a more organised market where there are standardised contracts. The more stringent system offers more protection and peace of mind to both future buyers and sellers (Khali, Mohammed, 2013).
b)It is a financial instrument which offers great leverage. Using a limited fund, greater gains can be achieved (Finance Learners, 2013).
c)Future contracts offer more flexibility in terms of time frame.
Although similar to forwards, futures have a maturity date; its standardised contracts and regulated market allow the buyer to switch position from buyer to seller if market moves in his favour earlier then anticipation. Disadvantages: a)It is still a more rigid contract where obligations need to be carried out upon maturity. Being more regulated, buyers or sellers are bound to more restrictions and laws (Khali, Mohammed, 2013).
b)Contra to the advantages of leverage above, more leverage means more risks are involved when you buy a future using relatively small capital.
The gain or loss can be substantial; it goes two ways (Finance Learners, 2013).
c)Future contracts are more rigid in terms of the amount transacted. As they are offered in contracts for example in denomination of 100 thousand each. It is not possible to buy a 150 thousand future contract. And if you want to buy 1 million worth of future contracts, you need to purchase ten contracts of 100 thousand which can be a hassle. iii)Options Advantages: a)It is able to take advantage either when the market moves down or up.
When the market moves down, you simply exercise the option which you purchased as insurance. When the market moves up, you can choose not to exercise the option and go into the spot market at that time to make profit from there. b)Given above, options give you the right but not the obligation to exercise the contract. c)Loss is limited as maximum loss will be the premium paid on the options. It is therefore less risky than other financial instruments (Financial Learners, 2013).
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Pan Boricua: Developing a Market Strategy For The Hispanic Market in the United States Pan Boricua Inc. was formed back in 2001 when Auriel Rivera and Franco came up with a plan to export Puerto Rican bread to the United States. Their major product was pan sobao which is bread that is known for its unique flavor and texture; and it’s made in Puerto Rico. An opportunity was identified when several ...
On the other hand, unlimited profit is possible depending on market movements.
Disadvantages: a)Option has an expiry date, if upon maturity the market does not move in buyer’s favour, the option will lapse and the buyer lost on the premium (Investopedia, 2013) b)There is a cost on options, called premiums. And premiums can be costly depending on the market volatility and time frame of the option the buyer want to purchase. If you want a longer period of time for the option, you have to pay more. c)Options are complicated even for the advance financial investors (Think trade, 2013).
5)Conclusion Word count : 1398
